So it was useful when I was in London recently to catch Will Hutton, recently installed as Principal of Hertford College, Oxford, give his take on the economic prospects for the UK in 2012 at an event hosted by the HMRC.

It’s hard to summarize quite a rich talk, but some points shone through:

The UK is living through a once-in-80-year economic event, but this isn’t reflected in the scale or urgency of the political or policy response.

UK GDP is still 4% below where it was in 2008, and won’t regain that until 2014, on government figures. But this is a problem of demand deficiency, not a systemic market problem. (The importance of this idea is all about political narrative. If demand is the problem, the wisdom of austerity is in doubt.)

The level of private debt is enormous (320% of GDP), but debt service levels are low, by any historic standards. But cutting the debt aggressively (the current policy preoccupation) risks creating a Japan-style lost decade and a half.

If that’s the bad news, what should be done?

Hutton has quite a long list of suggestions, but two caught my particular attention. The first is the reinvention of fairness. This involves bringing down the ratio of top pay to median pay, and making sure that bonuses aren’t a one-way bet, as they are present. He’s proposed an ‘earnback’ scheme, under which executives put some of their salary at risk in case of under-performance. Unsurprisingly, not one single FTSE-100 is in favor. Hutton had an earnback clause written into his contract when he joined Hertford College.

The other big story is about innovation. Governments can’t pick winners, but they can create ecologies that help particular sectors to evolve. The catch is that these innovation ecologies need public investment – especially in research institutes and skills development. The German network of Fraunhofer Institutes is the benchmark, and, of course, they’ve spent billions developing them over decades. But that doesn’t mean that it’s too late to start. The wide range of emerging ‘general purpose technologies‘ means that there is quite a lot of competitive space to play for. But it does need some political will.

The Future Perspectives reports on the eurozone and slow-growth economies were published this week. They’re available, free, for download from the website. The picture of Will Hutton is from Wikimedia Commons, and is used with thanks.